How to Invest Money - Amazon S3

[Pages:73]How to Invest Money

by J. David Stein

Darby Creek Advisors LLC - P.O. Box 397, Tetonia ID 83452 - jd@ -

? Copyright 2013 Darby Creek Advisors LLC All Rights Reserved.

Important Disclosure

J. David Stein is the qualifying officer for Darby Creek Advisors LLC, ("Darby Creek"), a registered investment advisor under the Investment Advisers Act of 1940 with the State of Idaho. Registration of an Investment Adviser does not imply any level of skill or training.

To the extent any of the content and opinions (hereinafter collectively referred to as "Information") may be deemed to be investment advice, such Information is impersonal and not tailored to the investment needs of any specific person.

The Information in this report is for educational purposes only. The Information does not consider the economic status or risk profile of any specific person.

The Information and opinions expressed should not be construed as investment/trading advice and does not constitute an offer, or an invitation to make an offer, to buy and sell securities.

The Information in this report was obtained from various sources. J. David Stein and Darby Creek Advisors LLC does not guarantee the accuracy or completeness of such Information provided by third parties.

Table of Contents

Stop Using Institutional Hand-me Downs .................................................................3 What is Risk?......................................................................................................6 You do not need to lose a ton of money in order to make money. .........7

Stay Close to Home Base.............................................................................................9 Playing Tag ........................................................................................................11 Investment Rule 2: Stay Close to Home Base .......................................11 Don't Lose Money .................................................................................13

Beware of Dragon Risk ..............................................................................................16 Predicting the Future ........................................................................................17 Investment Rule 3: Beware of Dragon Risk .........................................20

Mind Your Investment Seasons................................................................................24

Investment Conditions.....................................................................................24 Investment Rule 4: Mind Your Investment Seasons............................26 Market Valuations .................................................................................27

Catch the Popping Corn ............................................................................................31 We Are Human.................................................................................................32 Why Investing Is So Hard .....................................................................34 Investment Rule 5: Catch the Popping Corn ........................................35

Watch For Market Swarms .......................................................................................38 Market Sentiment ............................................................................................39 Investment Rule 6: Watch For Market Swarms ...................................40 Stories Investors Tell Themselves ........................................................42 Measuring Investor Sentiment .............................................................42

Track the Economic Winds.......................................................................................45 What Drives Corporate Profits? .......................................................................46 Economic Pie .........................................................................................47 Investment Rule 7: Track the Economic Winds ...................................48

Follow the Traffic Lights ...........................................................................................53 Slow and Fast Variables ...................................................................................53 Investment Rule 8: Follow the Traffic Lights .......................................56 Investment Philosophy ........................................................................58

Diversify Your Baskets .............................................................................................60 Baskets are Assets ............................................................................................60 Investment Rule 9: Diversify Baskets...................................................63

Don't Burn Your Ships ..............................................................................................65 Burning Ships ...................................................................................................66 Investment Rule 10: Don't Burn Your Ships ........................................67 Trading ..................................................................................................68 Conclusion .............................................................................................68

HOW TO INVEST MONEY

Introduction

How to Invest Money contains 10 Investment Rules I live by to invest my own money as well as to help Do-It-Yourself Investors invest theirs. I developed these 10 Rules based on my nearly 20 years of advising institutions, 401k plan sponsors, financial advisors and individual investors. These rules also evolved from my day-to-day experiences in managing nearly $2 billion in assets as Chief Portfolio Strategist for a $33 billion investment advisory firm. If you have any feedback or questions, please email me at jd@. - J. David Stein

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HOW TO INVEST MONEY

Investment Rule 1

"Individual investors are not pension plans so they should stop investing like them."

Stop Using Institutional Hand-

me Downs

When I was growing up, I wore a lot of hand-me down clothes from my cousin. Some I liked, such as a killer pair of red bell-bottom pants, but others I despised so I kept them hidden at the bottom of my drawer.

Individual investors face the the same situation. Most use institutional hand-medowns. These hand-me-downs are not clothes but are the tools and language that institutional investors, such as pension plans and college endowments, use to manage their portfolios. They include complicated sounding tools such as strategic asset allocation, monte-carlo simulation and market benchmarks.

While some of the tools and language are helpful, others should be stuffed in a drawer .....because they can lead individuals to make poor investment choices.

Remember: Individual investors are not pension plans so they should stop investing like them.

Institutional investment tools predominate because not only do institutions control the bulk of the world's investment assets, but those large pools of money

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HOW TO INVEST MONEY

invite a ton of scrutiny and oversight. Increased visibility and focus lead to a proliferation of institutional portfolio management tools developed by academics, consultants and other investment professionals.

Unfortunately, financial advisors, 401k sponsors and the financial press often take those same tools and apply them to individual investor portfolios. Using the same tools and language wouldn't be an issue if institutions and individuals were similar.

They are not.

There is one fundamental difference:

People die. Most institutions do not. The investment time horizon for institutions is significantly longer than that of individuals. In fact, most institutions invest for perpetuity. Consequently, institutions with their longer investment periods can afford to make mistakes because there is ample time to recover from them.

That brings up another major difference between institutions and individuals. Institutions get second chances. People often don't.

If institutions, such as a pension plans or college endowments, suffer devastating portfolio losses, they can go to their corporate sponsors and get more funds or raise more money from their donor base.

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